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My Amazon Mistake

Written by: Richard Saintvilus02/06/13 - 6:30 AM EST

Tickers in this article:
AAPL AMZN BBRY GOOG NFLX

NEW YORK ( TheStreet) -- I've said it before and I'll say it again: Valuation will always matter.

But in the tech sector, a complaint about a high P/E ratio is like protesting the wetness of water. Then there are relative comparisons such as Apple's (AAPL) incredibly low P/E of 10 versus Amazon.com's (AMZN) 3000.

Investors often air legitimate concerns such as slowing growth, but Amazon has been expensive for over a decade and has never stopped growing. I've now reached a point where I can admit that not buying the stock because of valuation concerns was a mistake. Today Amazon deserves every ounce of respect it gets.

While there's no denying Amazon is solid as any, and has arguably the best CEO in the business today, there's always been another concern: When will Amazon's bottom line matter and how long can investors afford such high premiums without meaningful profits?

Coming off a lackluster third-quarter, Amazon answered this call in the fourth quarter.

For the period ending in December, Amazon posted net income of $97 million, or 21 cents per share, on revenue of $21.27 billion. These results were much lower than analysts' estimates of 27 cents per share on revenue of $22.26 billion. What's more, on a year-over-year basis, net income dropped 45% -- hence the constant concerns about the bottom line.

However, revenue climbed 22% year over year, continuing its streak of sales growth that has now averaged 32% over the past six quarters. Nonetheless, Amazon still missed the Street's revenue estimates of $22.26 billion. So despite the holiday quarter expectations, Amazon missed on both the top and bottom lines.

However, following the report, shares rallied up almost 10%. The Street loved that Amazon improved in the one metric for which it is often criticized -- profitability, and in particular operating margin. That overall margins arrived better than expected affirmed the company's ability to establish better competitive leverage.

The company showed improved shipping performance/costs. Amazon also did well by focusing on higher value services, or those that generate the most profits. As a result, gross margin advanced by three and a half points. Likewise, pro forma operating income increased 47% while operating income rose 56%, both of which led to a margin improvement of a half point.

This was certainly an excellent performance, for which Amazon's CEO Jeff Bezos offered the following:

We're now seeing the transition we've been expecting. After five years, eBooks is a multi-billion-dollar category for us and growing fast -- up approximately 70% last year.

In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a bookseller, up just 5%. We're excited and very grateful to our customers for their response to Kindle and our ever-expanding ecosystem and selection.